Another Housing Bubble?

Debates about the for-profit education industry and the borrowing and default patterns of their students are generating analogies between the subprime mortgage debacle and students loans. Some commentaries use the “bubble” terminology to make this comparison. Questions of whether there is a bubble in higher education that parallels the bubble in the housing market have been around for quite a while. But the earlier analogies were based on rising prices for college, as opposed to fears of loan default.

Without weighing in on the pros and cons of any particular new proposed regulations, we think it is important to clarify some of the issues. Let’s start with the loans. There are good reasons to compare the student loan market—or at least the private student loan market—to the subprime mortgage market. The private student loan market—through which any student (and frequently anyone claiming to be a student ) could borrow up to the cost of attendance (sometimes but not always as certified by the institution)—grew from $7.6 billion in 2003-04 to $22.5 billion in 2007-08 before declining precipitously by about 50 percent in 2008-09. The market contracted partly because federal loans became more available to students, reducing demand, and partly because with the overall credit market collapse, lenders decided against lending to students with particularly low probabilities of repaying their loans.

In other words, there is little doubt that at least until recently loans were being made, bundled, and sold without regard for repayment prospects. Surely there are parallels to the subprime mortgage market. It is also clear from the unsettling stories we read every day that some students have borrowed very large amounts of money to finance educations of dubious value at for-profit institutions (and some nonprofit places too). But the question of whether or not those students should have access to credit differs significantly from the question of whether adults with little or no income or assets should be buying homes. The federal student loan programs provide federal guarantees precisely because students generally do not have collateral and would not be eligible for loans with reasonable terms in the private market. Only a few isolated voices argue that the federal government should ration credit away from students who are at risk of default. Many of those students are precisely the ones most vulnerable to missing out on the opportunity for postsecondary education in the absence of federally backed loans. We have made a policy decision that taxpayers should subsidize those loans in order to assure optimal educational opportunities. There is, of course, a question about exactly how much students should be allowed to borrow, and a big question about whether there are adequate safeguards to protect students who borrow beyond the limits of the federally subsidized programs. The question of quality control for the educational services for which students are borrowing is currently receiving well-deserved attention.

Even if credit markets have been lending irresponsibly so that students can pay costs of education that sometimes exceed the value of what they are actually getting, that is a separate issue from whether there is an education-bubble parallel to the housing bubble. Housing prices were bid up by easy credit that gave people the ability to pay more than they could really afford and by the expectation that housing prices would continue to rise. People bought houses thinking that they would be able to sell them in a few years and walk away with piles of cash. For a while, as we know, it worked. But when it stopped working, the the demand for housing and, hence, mortgages collapsed. In other words, the bubble of rising-price expectations burst.

The price of college has been rising very rapidly. But no one is buying an education in order to sell it to someone else for a profit. People are paying for education in the hope of increasing their earning power (and of improving the overall quality of their lives) over the long term. No one can take their education away from them. They will lose out only if the higher earnings generally associated with higher levels of education do not materialize. If the price of college were suddenly to fall precipitously as housing prices did (a very unlikely event), people who had already been educated would not be left having to sell an asset at a deflated price. The only danger they could face would be if earnings of college graduates fell dramatically relative to earnings of high-school graduates. The earnings differential now is very high. Median earnings for full-time workers with a bachelor’s degree were about 75 percent higher than median earnings for high school graduates in 2008. That premium could fall quite a bit before the typical college graduate would wish to trade in that degree.

Analogies make good headlines and there are surely lessons for higher education in recent developments in housing markets and the economy in general. But we should be careful about defining our questions clearly and examining the issues carefully.